Economics “is at Last a Science”

The dismal science is at last a science—and the world is the beneficiary.

Here are a few parts of the article, though much is omitted, which is mostly an argument about the virtues of the market system:

Economics Does Not Lie, by Guy Sorman, City Journal: Though economics as a discipline arose in Great Britain and France at the end of the eighteenth century, it has taken two centuries to reach the threshold of scientific rationality. Previously, intuition, opinion, and conviction enjoyed equal status in economic thought; theories were vague, often unverifiable. Not so long ago, one could teach economics at prestigious universities without using equations and certainly without the complex algorithms, precise (though not infallible) mathematical models, and computers integral to the field today.

No wonder bad economic policies ravaged entire nations during the twentieth century, producing more victims than any epidemic did. …

[Today] only one economic system exists: market capitalism. Virtually everywhere, the public sector has given ground to privatization; currency has escaped state control, to be governed by independent central banks; competition has taken wing, thanks to the deregulation of markets and the opening of borders; taxation has become less progressive, so as to encourage entrepreneurs and create jobs.

The results have been breathtaking. Opening economies and promoting trade have helped reconstruct Eastern Europe after 1990 and lifted 800 million people, many of them in China, Brazil, and a now-license-free India, out of poverty. Even in Africa and the Arab Middle East, nations that have embraced capitalism have begun to escape from the terrible underdevelopment that has long plagued them.

Behind all this unprecedented growth is … a scientific revolution in economics, as yet dimly understood by the public but increasingly embraced by policymakers around the globe. The revolution began during the sixties and has finally brought economists to a broad, well-founded consensus about what constitutes good policy. …

If economics is finally a science, what, exactly, does it teach? With the help of Columbia University economist Pierre-André Chiappori, I have synthesized its findings into ten propositions. Almost all top economists—those who are recognized as such by their peers and who publish in the leading scientific journals—would endorse them (the exceptions are those like Joseph Stiglitz and Jeffrey Sachs, whose public pronouncements are more political than scientific). The more the public understands and embraces these propositions, the more prosperous the world will become.

1. The market economy is the most efficient of all economic systems. …

7. Unemployment among unskilled workers is largely determined by how much labor costs. ….

8. While the welfare state is necessary in some form, it isn’t always effective. …

9. The creation of complex financial markets has brought about economic progress. …

10. Competition is usually desirable. …

These ten propositions should guide all economic policymaking, and to an increasing degree they do, worldwide. …

Some critics charge that economics is not a science in the way that, say, physics is—after all, economists can’t make precise predictions, as an exact science can. But this isn’t quite true: economists can predict that certain bad policies will lead necessarily to catastrophe. If economics, a human science, lacks the precision of physics, a natural one, it advances the same way—evolving from one theory to the next, each approximating a reality that eludes our complete grasp. …

[T]he complete realization, in practice, of the findings of economic science … has not arrived. The free market still has enemies and critics, ranging from those who dream of a world more just, more spiritual, or transformed in some other utopian way to those who simply seek to defend their own narrow material interests to those legitimate researchers who try to look beyond the market. And we must not overlook ignorance: economic principles aren’t widely understood among the public or even among lawmakers. The indisputable fact that the world has experienced a long period of growth as global trade has expanded remains strangely unknown. Doubtless the news is too good.

In the future, the threat to the beneficent influence of economic science will come less from tired socialist revolutionary rhetoric than from new dangers, such as terrorism and epidemics. … Terror and epidemics could both unleash political upheavals that would undermine the market order itself.

Then there’s the fear of ecological disturbances, which could result in incoherent policies that wouldn’t necessarily diminish risks to the environment but might prevent development and thus harm the interests of the poorest peoples. …

Another danger is inseparable from the very nature of economic systems: growth is cyclical. Despite the present anxiety about a recession, the time of major global economic crises seems to have passed, in large part because the progress of economic science allows governments and economic actors to understand crises and manage them better. The Great Depression probably couldn’t happen again…: the Federal Reserve, the European Central Bank, and the Bank of England have demonstrated as much in the current mortgage crisis by supporting the banking system. But smaller crises are inevitable, bound up as they are with innovation—and as the new drives out the old in creative destruction and forces sometimes painful adaptations, we find these upheavals harder to bear as we grow more accustomed to perpetual growth.

Similarly, free trade means that some people will lose their jobs, as we all know; foreign competition can wipe out entire companies or even entire industries. We all know it because, as Friedman argued, layoffs and closings get disproportionate media coverage. Meanwhile, nobody talks about the ongoing reduction in prices for consumers and investors, scattered among a huge number of beneficiaries. That helps explain why politicians are prone to deride free trade and voters are too often ready to agree.

To help the losers in the free market, government shouldn’t back away from either free trade or creative destruction and start subsidizing doomed and obsolete activities, a protectionist course that guarantees only economic decline. Instead, it should help the losers change jobs more easily by improving educational opportunities and by facilitating new investment, which creates more employment. An essential task of democratic governments and opinion makers when confronting economic cycles and political pressure is to secure and protect the system that has served humanity so well, and not to change it for the worse on the pretext of its imperfection.

Still, this lesson is doubtless one of the hardest to translate into language that public opinion will accept. The best of all possible economic systems is indeed imperfect. Whatever the truths uncovered by economic science, the free market is finally only the reflection of human nature, itself hardly perfectible.

The Mission of the Manhattan Institute is to develop and disseminate new ideas that foster greater economic choice and individual responsibility.

Since the Institute supports free market solutions to policy problems, you might think this article – which promotes the wonders of capitalism – would find a receptive audience among Libertarians. But Jeffery Tucker of the Ludwig von Mises Institute is unimpressed by this effort:

You call this capitalism?, by Jeffrey Tucker: Here is a huge piece in City Journal by Guy Sorman, the ostensible purpose of which is to herald the triumph of markets over socialism. He tells us that economics teaches this. Fair enough. But once you get into the article, you will find support for pollution trading permits, US imperial patrol of seas, central banking, bailouts of failing banks, patents, limited welfare, restrictions on insider trading, forced transparency rules, and a host of other interventions slyly mentioned in passing as somehow essential to markets. If this person were writing in say 1900, he would be considered a more socialist than capitalist in his thought, since his tendency is support every institution that was born of a market failure argument. Hey, I’m glad he is against wholesale nationalization but that’s about all that can be said for this disguised treatise on behalf of the interventionist social-democratic state. If this writer ever confronted a real supporter of the market, he would probably recoil in horror and start talking like a post-Marxist: dog eat dog, the jungle, survivalist of the fittest, and all that.

I’d think there’s something in this article for just about everyone to object to. For example, I disagree that “Milton Friedman’s … ‘monetarism,’ considered revolutionary when first proposed in the sixties, is now common wisdom.” Not exactly, unless you push pretty hard on the definition of monetarism so that it includes interest rate targeting. further than Friedman would have been comfortable with.

As another example, the article also comments on stabilization policy (in a section of the article that is not quoted above):

Governments also have the capacity to intervene and create seemingly positive outcomes when it comes to short-term growth, which is subject to incessant fluctuation. Yet the eventual effects of such interventions, which are more likely to have political than economic motivations, are always costly…

If I thought the costs of intervention to stabilize the economy exceeded the benefits, I wouldn’t support these policies, nor would anyone else. If things would be much worse without the polices – suppose we had managed to bring about a Great Depression type financial collapse by refusing to respond to the current financial crisis or by responding in ways that reinforced the crisis – then the policies haven’t cost us, they have saved us from something even worse.

Your turn. Comments?

Originally published at Economist’s View and reproduced here with the author’s permission.

6 Responses to "Economics “is at Last a Science”"

Josephus P. Franks August 15, 2008 at 10:52 am

It’s hard to write when I keep reflexively laughing… and when I have to continuously check the date to make sure this was indeed published in August of 2008 – and then rub my eyes to make sure I’m seeing clearly. And then stare at a blank wall to make sure I wasn’t surreptitiously slipped a hallucinogenic drug that is playing tricks on my eyes.Neoliberalism is dead. There are countless nails in its coffin. Only zombies can be counted among its devotees.

Steppenwolf August 15, 2008 at 11:43 am

Josephus, I’m laughing with you. It’s shocking to see how self-indoctrinated corporate capitalist ideologues are by the way they actually believe their own self-serving BS!So-called “free market” capitalism is a science!?! From the way they behave–how they dismiss 400 years of historic fact; write off the huge suffering of hundreds of millions of people; ignore the ecological and social destruction, etc., clearly shows it’s not a science, but a religious cult-like doctrine (much like Stalinism).The fact is both the traditional corporate capitalism of the last 300 years and the more recent centrally regulated state capitalism (often misnamed “socialism” or “communism”) are on the skids and have been for some time.The huge global debt problem, worsening poverty and insecurity, increasing starvation, ecological degradation, etc. are products of these models, and counting of them to fix what they created is, well, stupid to say the least.Fortunately, it seems with the recent waves of elections of newly reformed center-left coalitions in response to these worsening conditions in various parts of the world, we are seeing a modernized innovative interest in actual socialistic development, such the democratization of the economy overall and democratic sustainable (as opposed to profiteering) business models (worker and consumer co-ops, labour-sponsored ventures, democratic employee ownership, community economic development, workers getting control of their pensions and investing them with socially responsible mandates, etc.)Hopefully over time, these will become the new economic mainstay everywhere.

Josephus P. Franks August 15, 2008 at 2:05 pm

Yes, here’s hoping. One of the few things Milton Friedman said that I agree with – it’s a version of the Planck principle – was that new economic ideas aren’t implemented just because they’re better than old ones, but rather only during crises do dominant economic ideas get unseated and replaced with new ideas. During a crisis, people look around and pick whichever economic ideas are on the shelf. Let’s do all we can to ensure that there are ideas of a sustainable and equitable economic organization prominently displayed on that shelf…

Guest August 15, 2008 at 8:24 pm

There are some good points in the article but the underlying premise is wrong. Economics is not valuable because is gives government better tools to manipulate people and economies. Economics is valuable because it provides an understanding of human action. Economic results are understandable when the underlying circumstances are known. Economic results are not predictable in any real sense because the present and future realities and circumstances are not really known or predictable. The value of the laws of economics lies in the realization that free people make the best choices.The last 300 to 400 years has witnessed an incredible dawning of economic freedom in certain parts of the world. It is not a coincidence that those countries that most embraced the idea of economic freedom rapidly improved the circumstances for everyone, including the poor. Those countries that forsake economic freedom are those that have never developed or are stagnating after forfeiting their freedom to socialist thinkers. The policies that have ravaged nations are those that take away property rights and free markets.The mathematical rigor and scientism of much of modern economics promoted by many mainstream economists is playing mathematical games rather that attempts at finding truth. They are often models that promote and justify government action in manipulating people and markets.Governments have shown through the ages that the more they intervene in markets, the more damage they do. The bubbles and crashes of recent years are the direct result of economic manipulation by the monetary and fiscal authorities in government. It is interesting that, after the disaster in the Soviet Union and most socialist societies, that anyone can imply that any type of collectivism is superior in results or in moral virtue. Socialism is statism, and that is the root of growing social ills.

Steppenwolf August 15, 2008 at 10:46 pm

This is exactly the type of kooky historical rewriting, denial of fact and outright lying that we se from capitalist apologists of every variety.If in fact “The value of the laws of economics lies in the realization that free people make the best choices,” then capitalism clearly isn’t economics but psychotic religious cultism, since under every type of capitalist model, people are not free to make choices, but forced to adapt to imposed conditions from state-protected undemocratic agencies.”Those countries that forsake economic freedom are those that have never developed or are stagnating after forfeiting their freedom to socialist thinkers. The policies that have ravaged nations are those that take away property rights and free markets.”This, of course, is total fabrication. In the 400 years of capitalist-dominated economics–from colonial mercantilism to laisez faire to state owned or directed economies, “economic freedom” and “property rights” have been largely denied to everyone except a marginal elite of the population. That’s why right up until today most of the world lives in poverty and scarcity without any freedoms with a large minority somewhat better, thanks to socialistic reforms, but still living under insecure and restrictive conditions.It isn’t socialist “thinkers” that created this. It’s capitalist “thinkers,” or more accurately, dictators, feudal hang-overs, corporate manipulators, plutocrats and bureaucrats that have diligently maintained this order to their own huge advantage and everyone else’s expense.”They are often models that promote and justify government action in manipulating people and markets.”The fact is what most governments most often do is manipulate people and markets to suit private capital tyrannies and corporate interests in accumulating more wealth at people’s expense. that’s what they describe as “free markets:” totalitarian-run economies by major corporate elites with everyone else reacting to their dictates.”The bubbles and crashes of recent years are the direct result of economic manipulation by the monetary and fiscal authorities in government.”What he does not mention is that these manipulations that caused this are by corporate-controlled governments advocating “free market” and “privatization.” They have presided over the longest and most severe drop in overall living standards since the Great Depression.”It is interesting that, after the disaster in the Soviet Union and most socialist societies, that anyone can imply that any type of collectivism is superior in results or in moral virtue. Socialism is statism, and that is the root of growing social ills.”This of course is yet another outright lie these neo-cons have to rely on to justify themselves. The truth for anyone who’s interested in it (certainly not capitalist apologists) is the Soviet, Chinese et al models are/were not based on socialism, but on centrally regulated supposedly “transitional” state capitalism–coined by Lenin himself and adhered to by Stalin and Mao.http://www.blackwell-synergy.com/doi/abs/10.1111/1468-232X.00302?journalCode=irel%5DLenin: Industrial Management under a State Capitalist Monopoly Frameworkhttp://tinyurl.com/2hwvh9]Progress Publishers, Moscow; Lenin: State Capitalism during the Transition to Socialism (Index)http://www.marxists.org/reference/archive/mao/selected-works/volume-5/mswv5_30.htm]Mao: State capitalism on Building the Economy– Conference on Financial and Economic Framework 1953Nowhere is these models is socialism, as in the democratic control of business and the economy by working people and their communities for long-term sustainable community prosperity, allowed to actually thrive–certainly not as the predominant model (at least not until the “transition” is over).But what we see all over the world is that where socialistic development has thrived to any degree, the living standards and freedoms enjoyed by people are by far the most plentiful–like many European countries.Throughout history, it’s socialist-inspired democratic and social reforms that have clearly improved conditions for the largest number of people. Before the New Deal and the huge spread of unions in the US, most people were dirt poor, living off of subsistence. Within ten years, that changed.”Socialism is statism, and that is the root of growing social ills.”Given that above historic economic facts, don’t you feel a little silly saying such a ridiculous thing?

Guest August 28, 2008 at 10:41 pm

This is very funny. Science produces theories that can be tested, and when the theory fails the test, it is scrapped. Hence general relativity over Newtonian gravity, given the latter’s inability to predict the orbit of Mercury. In economics, seldom is there a theory with the ability to predict, and when one does come along (ie, Black-Scholes) and it fails, the fault is never with the theory but with reality.Two subtle points never brought up. First, the fundamental theorem of perfect competetion: It is impossible to make a profit in perfect competetion. Given that Adam Smith envisioned his automatic control system of capitalism as perfect competetion, it is clear that large structures like huge corporations don’t fit within the Smithian vision.Second, the traditional capitalist economists have almost universally condemned printing money as a means of financing a society. And yet as Milton Friedman himself pointed out, in a simple little book (Money Mischief) even most economists could understand, the US Treasury prints money in the guise of borrowing. They sell securities to the Fed which credits money to their account to pay bills, mostly unfunded “defense” spending, which is real (electronic) money. Of course, they are legally restricted from such creation willy-nilly, but the law is easily skirted by hiring middlemen to buy the debt, then sell it to the Fed for a fee. There are certified brokerage companies in the US with this as their sole function, and the commission they make is the fee paid to hide the lie that the debt is sold to “citizens.”Face it, economics is not science. It is a form of superstition, akin to faith-based religion with lots of branches all based on credulity. As a famous mutual fund manager once said, If you laid all economists end to end, it would be a good thing…It seems some are beginning to realize the appropriate model for the US economy is an elaborate form of what is often called a Ponzi scheme.